BLACKROCK: Current Stock Valuations Aren't High Enough To End The Bull Market

Friday

May 30, 2014 at 9:02 PM

Mamta Badkar

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Stocks Aren't So Expensive That Valuations Alone Can End The Bull Market (BlackRock Blog)

While the S&P 500 hit an all time closing high this week and though U.S. stocks are no longer cheap, "equities at the broad level aren’t so stretched as to suggest that valuation alone is likely to end the bull market," writes Russ Koesterich at BlackRock. While Koesterich expects returns to be lower in the coming five years than they were in the previous five years he argues that "global valuations are neither indicative of a market top nor at a point that would suggest aggressively lowering equity allocations."

"U.S. large cap valuations, for instance, as measured by the price-to-earnings ratio of the S&P 500 index, are above their long-term average, but not obscenely so."

"In addition, the overall macro environment – one of low inflation, low interest rates and accelerating growth– is a favourable one for stocks and is supportive of modestly higher valuations. Historically, investors have paid more for a dollar of earnings when inflation is lower. Nor is the prospect of rising rates a significant threat, at least not at these levels. When yields are below 4.5%, as they are today and should be through at least early next year, multiples actually tend to rise along with rates."

Mom And Pop Investors Are Returning To The Muni Bond Market (The Wall Street Journal)

Mom and Pop investors have returned to the Muni bond market as prices have rallied, writes Aaron Kuriloff at the WSJ. Investors have put $3.1 billion into muni bonds so far this year, up from $2.96 billion in the same period last year. The muni bond market faced a serious rout in 2013 follow Detroit's bankruptcy filing and as worries about Puerto Rico's debt surged. Retail investors value muni bonds in part for their tax benefits. "I don't think the need for tax-exempt income ever went away, and there appears to be pent-up demand," John Miller of Nuveen Asset Management LLC told Kuriloff.

Households Should Look To Dividends To Meet Their College-Savings Goals (Morningstar)

Dividends can help toward your college savings goal more than , says Josh Peters, director of equity-income strategy at Morningstar. "Dividend-paying stocks — in addition to providing more reliable returns because a large portion of that return isn't speculative, it doesn't depend on the market price, it's just cash that's flowing into the account, and providing me with the opportunity to reinvest — dividend-paying stocks, higher-yielding stocks also have a history of outperforming the broad market over long periods of time, not any given day or week or even year, but just in our own experience," Peters said.

"...But in addition to the likelihood that perhaps we can pick up a little bit of additional performance, we also get the benefit of the opportunity to reinvest the dividends. As the cash comes back to us in the form of those dividends, if stock prices go into a prolonged slump, then I'm buying cheaper stocks with higher yields, generating more income to reinvest and compound the real value of that college-savings program faster."

One Professional Explains Why She Left An RIA For A Robo-Advisor (Investment News)

Megan Graf left her job with a registered investment advisor (RIA) with $50 billion in assets under management (AUM) for Future Advisor, a robo-advisor, she writes in an Investment News column. "Put yourself in my shoes: I have, at a minimum, 40 years left in the job market," she writes. "And like it or not, algorithmic investing is doing more than creating competition in the industry — it is changing investors' expectations about fees, transparency, online access and even the service relationship itself."

"I knew that even if I achieved the success I sought at a traditional adviser, I would eventually face the added challenge of adapting a large, established firm to a new wave of high-net-worth investors: those who will emerge from today's mass affluent. I didn't see the necessary agility in the traditional model to scale for the next generation of clients anytime soon."

Investors Shouldn't Confuse ETFs And ETNs (Vanguard)

Exchange traded funds (ETFs) and exchange-traded notes (ETNs) are not to be confused. Jim Rowley, senior investment analyst at Vanguard Investment strategy reminds us that ETNs are basically "an IOU issued by a big financial institution that promises to pay the return on that underlying strategy, but you don’t own any underlying securities, you own a note." This means they bring credit risk.

"If the banking institution that is providing that promise were to go bankrupt, you potentially have a—there’s nothing backing it other than the general assets of the financial institution," explains Joel Dickson, principal in Vanguard investment strategy group.

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